Risk Management

1. What is Risk Management

A business risk is a future possibility that can prevent you from achieving your business goal. The risks facing a typical business are many and can include things that you can control, such as your strategy, and things that you cannot control, such as the global economy.

2. 5-Key Risks that Every Business faces

a. Development Risk

A business risk is a future possibility that can prevent you from achieving your business goal. The risks facing a typical business are many and can include things that you can control, such as your strategy, and things that you cannot control, such as the global economy.

b. Manufacturing Risk

If the product can be developed, can it actually be produced in appropriate volume at an appropriate cost?

c. Marketing Risk

If the product can be made, can it be sold effectively?
Will it meet the target market’s needs?
Will the product produce a profit when sold?

d. Financial Risk

Will the company be profitable and can the profits actually be realized in a form that allows investors to receive cash?

e. Growth Risk

If the company can achieve operating profitability at one level, can profitability be maintained as the company grows and evolves?

3. Different Types of Business Risks?

a. Competitive Risks

The risks that your competition will overtake you and prevent you from achieving your goal/s. Example, competitors that have a fundamentally cheaper cost base or a better product than you are offering.

b. Economic Risks

The possibility that the conditions in the economy will increase your costs or reduce your sales and profitability.

c. Operational Risks

The potential of failures related to the day-to-day operations of an organisation such as the customer service processes. Operational processes that are deemed to be complete and successful can also generate unexpected risks.

d. Legal Risks

The chance that new laws and regulations will disrupt your business or that you will incur expenses and losses due to a legal dispute are always on the horizon.

e. Compliance Risks

The chance that you will break laws, regulations and compliance issues. In many cases, a business may fully intend to follow the law but ends up violating regulations due to oversights and errors.

f. Strategy Risks

The risks associated with strategies are endless. On paper (and in our minds) the strategy looks great and will be profitable to the business. However, reality can deliver quite different results.

g. Reputation Risks

The chance of losses due to a declining reputation due to practices or incidents that are perceived as dishonest, disrespectful or incompetent. The term tends to describe a serious loss of confidence in an organisation rather than a minor decline in reputation.

h. Program Risks

The risks associated with a particular business program or portfolio of projects. Similar to Strategy Risk, on paper (and in our minds) the strategy looks great and will be profitable to the business. However, reality can deliver different results.

i. Project Risks

The risks associated with a project. Risk management of projects is a relatively mature discipline that is embedded in major project management methodologies.

j. Innovation Risks

Risks that apply to innovative areas in your business such as product research. Such areas require adapting risk management practices to assume relatively high-risk activities.

k. Country Risks

Exposure to the conditions to the countries in which you operate such as economic, environment and political events. The countries government may topple and the new regime is not friendly to your particular business or even range of products.

l. Quality Risks

The potential that you will fail to meet your quality goals for your products, services, and business practices.

m. Credit Risks

The risk that those who owe you money to fail to pay. For most businesses this is related to the accounts receivable risk. The same applies to monies that YOU OWE, which could seriously impede on cash flow.

n. Exchange Rate Risks

The risk that volatility in foreign exchange rates will impact the value of your business transactions and assets. Many global businesses have a high exposure to a basket of currencies that can add volatility to financial results such as Operating Margins.

o. Interest Rate Risks

A change in interest rates will and or could disrupt your business’s cash flow and profitability. For example, interest rates may increase your cost of capital and therefore impact your business model and profitability.

p. Taxation Risks

The potential for new tax laws or interpretations to existing tax laws could result in higher-than-expected taxes being paid. In some cases, new tax laws can completely disrupt or even destroy the business or industry.

q. Process Risks

The business risks associated with a particular process. Processes tend to be a focus of risk management as reducing risks in core business processes can often yield in cost reductions and improved profitability.

r. Resource Risks

The chance that you will fail to meet business goals due to a lack of resources such as cash or the supply of skilled and unskilled workers.

s. Political Risks

The potential for political events and outcomes to impede your business.

t. Seasonal Risks

A business with revenue that is concentrated on a single season such as a ski resort or an ice-cream business

4. 3-General Ways of Viewing Business Risks

1. Opportunity Based Risks

This type of risk comes from undertaking one opportunity over others. Opportunity-based risks for a business include moving a business to a different location, buying a new property or introducing a new product or service. By deciding to commit your resources to one opportunity, you risk – missing a better opportunity and/or getting unexpected result.

2. Uncertainty Based Risks

This type of risk is created from uncertainty around unknown or unexpected events. The risks connected to these events are hard to predict and the damage they can cause is usually unknown. It is also hard to control the damage once they occur. Examples of Uncertainty-Based Risks include:

• Legal/Court Action.
• Loss of important suppliers or customers
• Damage by fire, flood or other natural disasters
• Unexpected financial loss due to an economic downturn or bankruptcy of another business/es that owe you money.
• Decrease in market share – new competitor/product enters the market.

 

To reduce the impact of uncertain events on your business, you can do things like:

• Develop an Emergency Management Plan to reduce the damage to your business in an emergency
• Keep an up-to-date supplier database to help you to better manage your stock and equipment.
• Seek and use regular feedback from your customers and other people that your business deals with.
• Check your business environment regularly for risks such as changes in trends and customer expectations.
• Seek expert advice every now and then to check the financial health of your business and to get advice on how to improve your business.

 

3. Hazard Based Risks

These types of risks come from dangerous situations in the workplace. Some common examples include:

• Physical hazards caused by high noise levels, extreme weather or other environmental factors.
• Equipment hazards caused by faulty equipment or poor processes when using equipment such as machinery.
• Chemical hazards caused by improper storage or use of flammable, poisonous, toxic or carcinogenic chemicals.
• Biological hazards caused by viruses, bacteria, fungi or pests.
• Ergonomic hazards caused by poor workplace design, layout or equipment use.
• Psychological hazards caused by bullying and harassment, discrimination, heavy workload or mismatch of employee skills with job duties.

 

5. Why Should you Manage Risks?

By managing risk, you can reduce the impact of unexpected, and sometimes, unnecessary costly events on your business.

Managing risk can also help you to:

• Improve your relationships with customers, suppliers, employees and the community by understanding and managing their expectations.
• Improve staff confidence in a safe work environment,through workplace health and safety (WHS) and workers compensation insurance
• Keep your business open during natural or economic disasters, by having an emergency management plan
• Reduce your compliance and insurance costs by having a lower risk of damages.

 

You should attempt to always have enough information, or the resources, to manage every risk. A good Risk Management Plan will allow you to stop or modify your approach if it is not working or when unexpected risk happens.

6. Risks that SHOULD be managed?

You are required by law to manage some risks. For example, you must manage or reduce the risk of:

• Damaging the environment by meeting the Environmental Laws.
• Injury or harm to employees by having workers’ compensation insurance.
• Accidents and injury by making your workplace safe under Work Health and Safety (WHS) Laws.
• Customer complaints by treating customers fairly under Australian Consumer Laws.

 

7. Ways to Managing Business Risks –

a. Identify and Prioritise Which Risks Matter Most?

Before you create a Risk Management Plan, consider which areas of your business it will apply too. For example, you might only be interested in hazard-based risks. Some of the internal and external considerations that you need to think about are:

• Government Policies and Laws
• Your business aims, policies and strategies
• Social, cultural, political and regional issues
• Economic, technology and competitive trends

 

b. Consult with Stakeholders

Your risk management plan will be more specific and useful if you ask for feedback from the people, businesses or organisations you deal with. Stakeholders can include:

• Government agencies
• Clients, customers, and suppliers
• Your local communities and local media
• Business financiers, investors and insurers
• Employees, contractors and sub-contractors

 

Consulting with stakeholders will help you to:

• Respond to unexpected risks
• Keep your risk-framework up to date
• Get support for your risk management plan
• Bring together different views and areas of expertise
• Work out what your business considers as high/low risks

 

c. Identify and Clarify the Risks

Working out the risks to your business could be as easy as thinking about what could go wrong and how and why it could happen. You might also need to do some research into:

• Past events and risks
• Conducting market research
• Social and community issues that could affect business
• Possible future changes to your business environment, such as changes in economic trends.

 

To identify risks, you can also:

• Look at hazard logs, incident reports, customer feedback and complaints, and survey reports.
• Review audit reports such as financial audit reports or workplace safety reports
• Conduct a SWOT Analysis on your business – Strengths, Weaknesses, Opportunities and Threats
• Conduct a PEST Analysis on your business – Political, Economic, Social and Technological.
• Discuss business issues with your staff, customers, suppliers and business advisers.

 

d. Analyse the Risks

After identifying the risks to your business, it is time to work out which the:

• Damage that the risk would/will cause.
• Likelihood of the risk happening. Work out a rating system for
  damage and likelihood. For example, you could have ratings of:
• 1 to 4 for damage –
  1 for slight damage – 4 for severe damage
• 1 to 4 for likelihood –
  1 for not likely – 4 for extremely likely

 

e. Evaluate the Risks

Risk criteria sets a standard to assess risks to your business.

• To set your risk criteria – state the level and nature of risks that are acceptable or unacceptable in your workplace.
• To evaluate risk – compare the level of risk for various events against your risk criteria. You should also check if your existing risk management methods are enough to accept the risk.

 

f. When to accept risk

Your strategy for managing risk may be more than just deciding whether to accept the risk or not. If your business is part of a bigger supply chain that involves retailers, distributors or primary producers, you can spread the risk across several areas. Sometimes businesses choose to accept risks and not spend any resources on avoiding them. You might decide to accept a level of risk for the following reasons:

• The risk level works out to be very low.
• The benefit of taking the risk greatly outweighs the possible damage.
• The cost of treatment is much higher than the potential results of the risk.

 

g. Treat the Risks

Your evaluation will have helped you to identify any risks that need to be treated. Develop your plan to treat risks, including:

• Timeframes for each strategy
• Suggested strategies to treat each risk
• Who is responsible for specific parts of the plan?
• Each risk type and the level of risk to your business
• Resources required such as money, staff, and external help
• Future action such as regular checking and updating of risks

 

h. Plan to REDUCE future Risks

Committing to quality risk management can help you create a stable business that allows you to be somewhat prepared for unexpected events. As a business owner, it is a good idea to:

• Make sure your business aims link to your risk management plan.
• Clearly describe your risk management plan to all stakeholders
• Show genuine support for the risk management plan
• Set up a way of monitoring and measuring the success of your risk management plan
• Regularly check that your way of measuring is giving you useful, timely and accurate information
• Make it clear who is responsible for what
• Provide enough resources at all levels of your business so as to ensure that the risk management plan has a greater chance of success
• Ask for feedback from all stakeholders directly or indirectly involved with your business.
• Use received feedback to update your plan.
• Explain your risk management plan to new employees during induction and any training programs.

 

8. How to best Manage Risks?

Begin by finding out about risk management practices and how you can use them. You should also talk to others involved in your business (including your employees and customers) to decide on the best way to manage risk in your business. Before you decide what to do, you will need to work out what your risks are, and which ones are most urgent:

• Identify – Work out what risks your business could face.
• Analyse – Find the level of the risk/s and prioritize them.
• Evaluate – Compare the risk/s against set risk criteria to decide what to do.

 

9. 5-Features of a Strong Risk Management program

1. Senior Management Champions the Program

The success of a risk management program depends on the active support of senior management.

2. They are Inclusive

Effective risk management programs do not rely on the work and resources of any single person or group within the organization. Whilst often led by a Risk Management Officer, the best programs draw on the input and co-operation of every part of the organization.

3. They are Transparent

Risk management programs work best and companies reap the greatest possible benefit from them when their goals, processes and results are shared with all the company’s stakeholders.

4. They are Holistic

The best risk management programs not only addresses all the risks to which modern corporations are susceptible, they also consider how these various risks can affect the company,s stakeholders and overall operations.

5. They are Proactive

Effective risk management programs do not merely insure companies against downside risks, they also include proactive systems and processes to maximize the opportunities presented by variable risks.

10. Risk Management in the Internet Age

Businesses encounter a number of risks when they use the Internet to establish and maintain relationships with their customers or suppliers.

Increased reliance on the Internet demands that business owners decide how much risk to accept and implement security systems to manage the risk associated with online business activities.

The introduction and growth of the Internet age has provided for a totally changed communications landscape. Conducting business online exposes a company to a wide range of potential risks, including:

• Liability due to infringement on copyrights, patents or trademarks
• Charges of defamation due to statements made on a Website or via email
• Charges of invasion of privacy due to unauthorized use of personal information or excessive monitoring of employee communications
• Liability for harassment due to employee behavior online
• Legal issues due to accidental noncompliance with foreign laws.

 

11. Conclusion

The importance of risk management in projects cannot be overstated. Awareness of risk has increased as we currently live in a less stable economic and political environment.

The importance of risk management in projects cannot be overstated. Awareness of risk has increased as we currently live in a less stable economic and political environment.

However, it is generally agreed that the consequences of risk management failure can be dire. There is a clear imperative for many companies to develop a strong, consistent, enterprise wide-risk management program, as most prevalent business risks will either remain at current levels or increase.

In pursuing this goal, companies would do well to begin by identifying their top revenue drivers, then pinpointing the top threats to those revenue drivers and distinguishing between those that are predominantly downside risks and those that are predominantly variable risks.

While both categories of risk deserve attention, companies may discover the effectiveness of their risk management programs are most effective if they devote more of their attention to controlling risk rather than transferring it to insurance companies. And the risks that can be most directly controlled are downside risks, the very risks that are most likely to threaten company’s top revenue drivers. When downside risks are dealt with first through prevention and control, it enables senior management to deal more aggressively with variable risks. In short, they become more proactive and strategic with their risk management approach.

Because companies indicate that they expect having trouble finding the time, budget and people necessary to implement or maintain a strong risk management program, senior management must demonstrate leadership in championing and funding this initiative. The number one consequence of poor risk management is loss of competitiveness… and profitability.

By implementing an effective risk management program, companies protect their ability to compete.

There is nothing more fundamental to business success!